Markets Daily
Bond yields and the US dollar rose Friday, helped by stronger US consumer sentiment and inflation expectations. AUD slipped back to 0.6835. Today’s calendar features China Q2 GDP and US July Empire State survey. Japanese markets are closed for a holiday.
Friday
With the data calendar quiet, attention was firmly focused on the replacement (from September) of Philip Lowe as RBA Governor with his deputy, Michele Bullock. AUD/USD eased 20 pips lower to 0.6870. The ASX 200 outperformed most of the region, closing up 0.8%.
Currencies/Macro
The US dollar made notable gains against most major currencies on Friday. EUR/USD touched 1.1245 (highest since February 2022) but was overall little changed at 1.1225. GBP/USD fell about half a cent to 1.3090. USD/JPY traded a wide range from 137.25 to 139.16 and start the week up about 0.6% net at 138.80. AUD/USD fell about 55 pips or -0.8% over the day to 0.6835. NZD/USD fell from 0.6412 (highest since February) to 0.6360. AUD/NZD fell 35 pips to 1.0740.
July US consumer sentiment (University of Michigan) was stronger than expected at 72.6 (est. 65.5, prior 64.4), with firmer current conditions at 77.5 (est. 70.5, prior 69.0) and expectations at 69.4 (est. 62.0, prior 61.5). Inflation expectations one year ahead rose to 3.4% (est. 3.1%, prior 3.3%), the 5-10yr ahead measure to 3.1% (est. unchanged at 3.0%).
Interest rates
US 2yr treasury yields rose from 4.64% to 4.77% while the 10yr yield rose from 3.76% to 3.83%. Markets are pricing the Fed funds rate, currently 5.125% (mid), to be 24bp higher at the next meeting on 27 July, and another 10bp higher by November.
Australian 3yr government bond yields (futures) rose from 3.86% to 3.92%, while the 10yr yield rose from 3.95% to 4.00%. Markets are pricing the RBA cash rate, currently at 4.10%, to be 10bp higher at the next meeting on 1 August, and another 24bp higher by February.
New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be only 4bp higher at the next meeting on 16 August and to peak at 5.62% in November.
Credit indices were weaker on Friday with Main a bp wider to 70.5 and CDX out 2bp to 67, however both remain near their year to date lows (ie, below early Feb levels), while US IG cash spreads were more subdued and have been little changed on the week, remaining ~12bp off their tights of early Feb (Bberg IG). We saw no supply in either the US or Europe to close out last week as volumes for the week failed to meet fairly soft targets. With US earnings now underway, post earnings supply will now be watched with the large banks first up as deposit growth slows across the sector.
Commodities
Crude markets softened Friday as traders took profit ahead of key technical levels. The August WTI contract fell $1.47 Friday to $75.42 though still closed up 2.1% on the week while the September Brent contract closed down $1.49 at $79.87 though still closed up 1.78% on the week. WTI failed just ahead of the 200dma which it has not closed above since August last year. However, news late last week that Libya’s second largest oil field was halted due to protests while the Forcados terminal in Nigeria was also halted due to a potential leak helped sentiment through last week. Russian crude exports are also falling according to Bloomberg shipping data while Saudi exports are running at about 6.25mbpd in the first 13 days of July compared with an average of 6.66mbpd in June. And Bloomberg reported that at least 18 supertankers are expected to head across the Pacific from the US late Q3 after Asian buyers including refiners in China, South Korea, India and even Japan snapped up circa 36mb of US crude with a big portion of the grades purchased being WTI Midland. Lower freight rates and a plunge in the relative price of Brent/ WTI to Dubai oil benchmarks has pointed towards a pickup in Asian demand for Western grades.
Despite the extreme temperatures baking Southern Europe and the US, natural gas prices saw their largest falls for the year last week with the August TTF contract down 2.4% Friday bringing the total to 22% on the week. US climate envoy John Kerry arrived in China on Sunday to restart stalled negotiations over global warming.
Metals were mixed but overall lower with copper down 0.26% at $8,671 and aluminium down 0.2% at $2,273. Nickel rose by 1.6% to $21,630 though zinc fell by 1.8% to $2,434. Despite the modest falls Friday, the drop in the US$ saw aluminium up 6% on the week while copper rose 3.6%. The extreme heat and rising energy demand in the Sichuan region in China has seen steel, cement and aluminium production impacted.
Iron ore climbed for a fourth day with the PBoC’s Liu noting Friday that monetary policy would be “targeted and forceful”. The August SGX contract is up another $2.05 from the same time Friday at $114.00 while the 62% Mysteel index is up $4.85 to $116.70. China will report a raft of data this week including June output data today which will detail steel and aluminium production and then base metal and oil output on Wednesday. We also have Vale’s quarterly production report on Tuesday, Rio’s on Wednesday and BHP’s full year report on Thursday.
Day ahead
At 12pm Syd we see key activity data from China. A softer GDP outcome is anticipated in Q2 given the slowing of post-COVID reopening momentum. Consensus is 0.8%qtr versus 2.2%qtr in Q1, but the very low base effect of lockdown-depressed Q2 2022 should boost headline y/y growth to 7.1% from Q1’s 4.5%. June monthly activity data will also be worth watching for an indication of momentum. Consensus is a soft 2.5%yr for industrial production, down from 3.5%yr in May and just 3.3%yr for retail sales versus 12.7%yr in May.
Markets in Japan are closed for a holiday (Marine Day).
US: The New York Fed’s Empire State manufacturing index has been fairly volatile this year, highlighting uncertainty over the manufacturing outlook (market f/c: –3.5 for July).
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